Friday, February 1, 2008

It's such a marginal miss and the stock is down 200 points from its peak and not a very expensive stock. They're still taking share.

The alarming part of their report was the drop in click through on their ads. They cited a drop-off of some 9% from the prior quarter. Are consumers so beleaguered that they don't even have the desire to click on ads? Or as time has gone on are people learning how not to click on them by mistake? Are they tuning them out like white noise?Their comments about social networking being a disappointment are ominous. They paid an awful lot of money to advertise on myspace and now they're saying it's not what they'd hoped. These are ongoing payments. They're locked into this deal for years to come. It suggests that TAC (traffic acquisition cost) as a percentage of revenues will continue to rise disproportionately unless they can figure out how to better monetize that traffic.

That said, the stock is growing at twice the P/E and there's no better game in town at present. The Yahoo integration uncertainty is going to create a good near-term environment for them.

Sometimes I worry about Google throwing money around at too many different businesses... flailing around, trying to find the next big growth avenue. Myspace could be a fluke mishap. Youtube isn't very monetized either. Suddenly it seems like more than coincidence.

They're scanning every book ever printed, they're bidding for wireless spectrum, they're going into cell phones... these seem like disparate pursuits. I'm not entirely sure they know where they're going next. I think on some level its spaghetti investing -- throwing a little of everything at the wall to see what sticks. That's typically an indicator of failure, not success, over time. It causes distraction, dilutes focus, fosters chaos.

Pleasurable work environment is a big selling point for Google's employees. They're pampered to no end with restaurants, an on site spa, laundry services, a campus car wash... the list goes on. Google has a mantra that everyone at the company should spend 20% of their time pursuing a personal project, hoping to bubble ingenuity to the surface from their employee's passion. That sounds great but it also sounds hard to moderate. You want your employees to be motivated and not stuck in a rut but you also need clear leadership and an understandable, achievable target. I'm not sure they know what their target is right now.

In my opinion, it's figuring out how to better monetize social networking. Fast.

The company is growing at 50% y/y, which is deceleration. Estimates next year are for $26 in EPS. So at $516, the last sale, that's under 20 * EPS for a company growing over 50%. Tough sale there. You've got to think the company's growth rate is going to plateau and that the earnings numbers are too high. I think it's soon to make that conclusion.